Question 1

Figure 5.2.1
-Refer to Figure 5.2.1 above. Which of the two figures describes a risk averse individual?

Accepted Answer

A)  The figure in panel (a) 
B)  The figure in panel (b) 
C)  Both figures 
D)  Neither figure 
A)  The figure in panel (a) 
B)  The figure in panel (b) 
C)  Both figures 
D)  Neither figure C

Question 2

Scenario 5.4:
Suppose an individual is considering an investment in which there are exactly three possible outcomes, whose probabilities and payoffs are given below:
   The expected value of the investment is $25. Although all the information is correct, information is missing.
-Refer to Scenario 5.4. What is the payoff of outcome C?

Accepted Answer

A)  -150 
B)  0 
C)  25 
D)  100 
E)  150 
A)  -150 
B)  0 
C)  25 
D)  100 
E)  150 A

Question 3

During the most recent recession, many people temporarily lost substantial value in their retirement investment portfolios because most of the assets (including stocks, bonds, and real estate) all declined in value at the same time. In hindsight, what was the problem with these portfolios?

Accepted Answer

A)  The portfolios were not adequately diversified because the assets were negatively correlated, so all of the assets had negative returns at the same time. 
B)  The portfolios were not adequately diversified because the assets were more positively correlated than expected, so all of the assets had negative returns at the same time. 
C)  The portfolios were adequately diversified, but the assets should have been more positively correlated to protect against recession risk. 
D)  The investors should not have diversified their investments to protect against recession risk. 
A)  The portfolios were not adequately diversified because the assets were negatively correlated, so all of the assets had negative returns at the same time. 
B)  The portfolios were not adequately diversified because the assets were more positively correlated than expected, so all of the assets had negative returns at the same time. 
C)  The portfolios were adequately diversified, but the assets should have been more positively correlated to protect against recession risk. 
D)  The investors should not have diversified their investments to protect against recession risk. B

Question 4

Scenario 5.3:
Wanting to invest in the computer games industry, you select Whizbo, Yowzo and Zowiebo as the three best firms. Over the past 10 years, the three firms have had good years and bad years. The following table shows their performance:
  
-Refer to Scenario 5.3. Where is the highest expected revenue, based on the 10 years' past performance?

Accepted Answer

A)  Whizbo 
B)  Yowzo 
C)  Zowiebo 
D)  Whizbo and Yowzo 
E)  Yowzo and Zowiebo 
A)  Whizbo 
B)  Yowzo 
C)  Zowiebo 
D)  Whizbo and Yowzo 
E)  Yowzo and Zowiebo

Question 5

Scenario 5.10:
Hillary can invest her family savings in two assets: riskless Treasury bills or a risky vacation home real estate project on an Arkansas river. The expected return on Treasury bills is 4 percent with a standard deviation of zero. The expected return on the real estate project is 30 percent with a standard deviation of 40 percent.
-Refer to Scenario 5.10. If Hillary invests 30 percent of her savings in the real estate project and the remainder in Treasury bills, the expected return on her portfolio is:

Accepted Answer

A)  4 percent. 
B)  11.8 percent. 
C)  17 percent. 
D)  22.2 percent. 
E)  30 percent. 
A)  4 percent. 
B)  11.8 percent. 
C)  17 percent. 
D)  22.2 percent. 
E)  30 percent.

Question 6

Blanca would prefer a certain income of $20,000 to a gamble with a 0.5 probability of $10,000 and a 0.5 probability of $30,000. Based on this information:

Accepted Answer

A)  we can infer that Blanca neutral. 
B)  we can infer that Blanca is risk averse. 
C)  we can infer that Blanca is risk loving. 
D)  we cannot infer Blanca's risk preferences. 
A)  we can infer that Blanca neutral. 
B)  we can infer that Blanca is risk averse. 
C)  we can infer that Blanca is risk loving. 
D)  we cannot infer Blanca's risk preferences.

Question 7

When facing a 50% chance of receiving $50 and a 50% chance of receiving $100, the individual pictured in Figure 5.2.2:

Accepted Answer

A)  would pay a risk premium of 10 utils to avoid facing the two outcomes. 
B)  would want to be paid a risk premium of 10 utils to give up the opportunity of facing the two outcomes. 
C)  would pay a risk premium of $7.50 to avoid facing the two outcomes. 
D)  would want to be paid a risk premium of $7.50 to avoid facing the two outcomes. 
E)  has a risk premium of 10 utils. 
A)  would pay a risk premium of 10 utils to avoid facing the two outcomes. 
B)  would want to be paid a risk premium of 10 utils to give up the opportunity of facing the two outcomes. 
C)  would pay a risk premium of $7.50 to avoid facing the two outcomes. 
D)  would want to be paid a risk premium of $7.50 to avoid facing the two outcomes. 
E)  has a risk premium of 10 utils.

Question 8

Bill's utility function takes the form U(I) = exp(I) where I is Bill's income. Based on this utility function, we can see that Bill is:

Accepted Answer

A)  risk averse. 
B)  risk neutral. 
C)  risk loving. 
D)  He can exhibit two or more of these risk behaviors under this utility function. 
A)  risk averse. 
B)  risk neutral. 
C)  risk loving. 
D)  He can exhibit two or more of these risk behaviors under this utility function.

Question 9

The weighted average of all possible outcomes of a project, with the probabilities of the outcomes used as weights, is known as the:

Accepted Answer

A)  variance. 
B)  standard deviation. 
C)  expected value. 
D)  coefficient of variation. 
A)  variance. 
B)  standard deviation. 
C)  expected value. 
D)  coefficient of variation.

Question 10

In Eugene, Oregon, next year there is a 2% chance of an earthquake severe enough to destroy all buildings and personal property. Quincy, who has $3,000,000 in buildings and personal property, has the opportunity to purchase complete earthquake insurance. Which is true?

Accepted Answer

A)  Quincy should not purchase earthquake insurance unless he can get it for less than $60,000, because that's all he could possibly lose in an earthquake. 
B)  Quincy should not purchase earthquake insurance unless he can get it for less than $60,000, because that's his expected loss in an earthquake. 
C)  If Quincy buys earthquake insurance, and an earthquake does not occur, he will have received no utility from the transaction. 
D)  What Quincy is willing to pay for the earthquake insurance depends upon his degree of risk aversion. 
E)  Quincy should be willing and able to pay up to $3,000,000 for earthquake insurance. 
A)  Quincy should not purchase earthquake insurance unless he can get it for less than $60,000, because that's all he could possibly lose in an earthquake. 
B)  Quincy should not purchase earthquake insurance unless he can get it for less than $60,000, because that's his expected loss in an earthquake. 
C)  If Quincy buys earthquake insurance, and an earthquake does not occur, he will have received no utility from the transaction. 
D)  What Quincy is willing to pay for the earthquake insurance depends upon his degree of risk aversion. 
E)  Quincy should be willing and able to pay up to $3,000,000 for earthquake insurance.

Question 11

The information in the table below describes choices for a new doctor. The outcomes represent different macroeconomic environments, which the individual cannot predict.Table 5.3
  
-In Table 5.3, the standard deviation is:

Accepted Answer

A)  highest for the HMO choice, and it is $76,000. 
B)  lowest for the HMO choice. 
C)  higher for owning one's own practice than for going into research. 
D)  higher for the HMO choice than for going into research. 
A)  highest for the HMO choice, and it is $76,000. 
B)  lowest for the HMO choice. 
C)  higher for owning one's own practice than for going into research. 
D)  higher for the HMO choice than for going into research.

Question 12

Irene's utility of income function is   Irene is offered the following game of chance. The odds of winning are 1/100 and the payoff is 75 times the wager. If she loses, she loses her wager amount. Calculate Irene's expected utility of the game.

Accepted Answer

Irene's Expected Utility of th

Question 13

The standard deviation of a two-asset portfolio (with a risky and a non-risky asset) is equal to:

Accepted Answer

A)  the fraction invested in the risky asset times the standard deviation of the non-risky asset. 
B)  the fraction invested in the non-risky asset times the standard deviation of the risky asset. 
C)  the fraction invested in the risky asset times the standard deviation of that asset. 
D)  the fraction invested in the non-risky asset times the standard deviation of that asset. 
A)  the fraction invested in the risky asset times the standard deviation of the non-risky asset. 
B)  the fraction invested in the non-risky asset times the standard deviation of the risky asset. 
C)  the fraction invested in the risky asset times the standard deviation of that asset. 
D)  the fraction invested in the non-risky asset times the standard deviation of that asset.

Question 14

Consider the following information about job opportunities for new college graduates in Megalopolis:Table 5.1
  
-Refer to Table 5.1. A risk-neutral individual making a decision solely on the basis of the above information would choose to major in:

Accepted Answer

A)  accounting. 
B)  economics. 
C)  English. 
D)  political science. 
E)  mathematics. 
A)  accounting. 
B)  economics. 
C)  English. 
D)  political science. 
E)  mathematics.

Question 15

Scenario 5.7:
As president and CEO of MegaWorld Industries, Natasha must decide on some very risky alternative investments. Consider the following:
  
-Refer to Scenario 5.7. As a risk-neutral executive, Natasha:

Accepted Answer

A)  is indifferent between projects D and E. 
B)  prefers project E to project D, but do not necessarily consider E the best. 
C)  prefers project E to all other projects. 
D)  seeks the highest "profit if successful" of all the projects. 
E)  seeks the project with the most even odds. 
A)  is indifferent between projects D and E. 
B)  prefers project E to project D, but do not necessarily consider E the best. 
C)  prefers project E to all other projects. 
D)  seeks the highest "profit if successful" of all the projects. 
E)  seeks the project with the most even odds.

Question 16

Individuals who fully insure their house and belongings against fire:

Accepted Answer

A)  have wasted their money if a fire does not occur. 
B)  generally do so in order that their after-fire wealth can be equal to their before-fire wealth. 
C)  generally do so in order that their after-fire wealth can be higher than their before-fire wealth. 
D)  generally do so in order to guarantee that the worst outcome, a fire with no insurance, does not occur. 
E)  can never come out as well financially after a fire as they were before it. 
A)  have wasted their money if a fire does not occur. 
B)  generally do so in order that their after-fire wealth can be equal to their before-fire wealth. 
C)  generally do so in order that their after-fire wealth can be higher than their before-fire wealth. 
D)  generally do so in order to guarantee that the worst outcome, a fire with no insurance, does not occur. 
E)  can never come out as well financially after a fire as they were before it.

Question 17

Any risk-averse individual would always:

Accepted Answer

A)  take a 10% chance at $100 rather than a sure $10. 
B)  take a 50% chance at $4 and a 50% chance at $1 rather than a sure $1. 
C)  take a sure $10 rather than a 10% chance at $100. 
D)  take a sure $1 rather than a 50% chance at $4 and a 50% chance at losing $1. 
E)  do C or D above. 
A)  take a 10% chance at $100 rather than a sure $10. 
B)  take a 50% chance at $4 and a 50% chance at $1 rather than a sure $1. 
C)  take a sure $10 rather than a 10% chance at $100. 
D)  take a sure $1 rather than a 50% chance at $4 and a 50% chance at losing $1. 
E)  do C or D above.

Question 18

To optimally deter crime, law enforcement authorities should:

Accepted Answer

A)  set higher fines for crimes that have a lower probability of being caught. 
B)  set the fine equal to the expected benefit, even if it is difficult to catch the offenders. 
C)  ignore the probabilities of catching offenders and attempt to prevent crime at all costs. 
D)  set very high fines regardless of the probability that an offender is caught. 
A)  set higher fines for crimes that have a lower probability of being caught. 
B)  set the fine equal to the expected benefit, even if it is difficult to catch the offenders. 
C)  ignore the probabilities of catching offenders and attempt to prevent crime at all costs. 
D)  set very high fines regardless of the probability that an offender is caught.

Question 19

Mel and Christy are co-workers with different risk attitudes. Both have investments in the stock market and hold U.S. Treasury securities (which provide the risk free rate of return). Mel's marginal rate of substitution of return for risk   where   is the individual's portfolio rate of return and σP is the individual's portfolio risk. Christy's   Each co-worker's budget constraint is   where   is the risk-free rate of return,   is the stock market rate of return, and   is the stock market risk. Solve for each co-worker's optimal portfolio rate of return as a function of   ,   and   .

Accepted Answer

We know that the slope of the indifferen

Question 20

Jack is near retirement and worried that if the stock market falls he will not be able to wait to take his funds out, and will have to sell at the bottom of the market. Richard thinks the probability of a stock market downturn is the same, but he is only 40 and could therefore wait for another turnaround. They face the same budget line. Jack's risk/return indifference curve:

Accepted Answer

A)  will be concave; Richard's will be convex. 
B)  will be convex; Richard's will be concave. 
C)  will be tangent to the budget line at a point to the left of Richard's. 
D)  will be tangent to the budget line at a point to the right of Richard's. 
E)  must still be tangent to the budget line at the same point as Richard's. 
A)  will be concave; Richard's will be convex. 
B)  will be convex; Richard's will be concave. 
C)  will be tangent to the budget line at a point to the left of Richard's. 
D)  will be tangent to the budget line at a point to the right of Richard's. 
E)  must still be tangent to the budget line at the same point as Richard's.

Figure 5.2.1 -Refer to Figure 5.2.1 above. Which of the two figures describes a risk averse individual?

During the most recent recession, many people temporarily lost substantial value in their retirement investment portfolios because most of the assets (including stocks, bonds, and real estate) all declined in value at the same time. In hindsight, what was the problem with these portfolios?

Blanca would prefer a certain income of $20,000 to a gamble with a 0.5 probability of $10,000 and a 0.5 probability of $30,000. Based on this information:

When facing a 50% chance of receiving $50 and a 50% chance of receiving $100, the individual pictured in Figure 5.2.2:

Bill's utility function takes the form U(I) = exp(I) where I is Bill's income. Based on this utility function, we can see that Bill is:

The weighted average of all possible outcomes of a project, with the probabilities of the outcomes used as weights, is known as the:

In Eugene, Oregon, next year there is a 2% chance of an earthquake severe enough to destroy all buildings and personal property. Quincy, who has $3,000,000 in buildings and personal property, has the opportunity to purchase complete earthquake insurance. Which is true?

The information in the table below describes choices for a new doctor. The outcomes represent different macroeconomic environments, which the individual cannot predict.Table 5.3 -In Table 5.3, the standard deviation is:

Irene's utility of income function is Irene is offered the following game of chance. The odds of winning are ¹/₁₀₀ and the payoff is 75 times the wager. If she loses, she loses her wager amount. Calculate Irene's expected utility of the game.

The standard deviation of a two-asset portfolio (with a risky and a non-risky asset) is equal to:

Consider the following information about job opportunities for new college graduates in Megalopolis:Table 5.1 -Refer to Table 5.1. A risk-neutral individual making a decision solely on the basis of the above information would choose to major in:

Scenario 5.7: As president and CEO of MegaWorld Industries, Natasha must decide on some very risky alternative investments. Consider the following: -Refer to Scenario 5.7. As a risk-neutral executive, Natasha:

Individuals who fully insure their house and belongings against fire:

Any risk-averse individual would always:

To optimally deter crime, law enforcement authorities should:

Preliminaries

The Basics of Supply and Demand

Consumer Behavior

Individual and Market Demand

Production

The Cost of Production

Profit Maximization and Competitive Supply

The Analysis of Competitive Markets

Market Power: Monopoly and Monopsony

Pricing With Market Power

Monopolistic Competition and Oligopoly

Game Theory and Competitive Strategy

Markets for Factor Inputs

Investment, Time, and Capital Markets

General Equilibrium and Economic Efficiency

Markets With Asymmetric Information

Externalities and Public Goods

Behavioral Economics

Filters

Exam 5: Uncertainty and Consumer Behavior

Figure 5.2.1 -Refer to Figure 5.2.1 above. Which of the two figures describes a risk averse individual?

During the most recent recession, many people temporarily lost substantial value in their retirement investment portfolios because most of the assets (including stocks, bonds, and real estate) all declined in value at the same time. In hindsight, what was the problem with these portfolios?

Blanca would prefer a certain income of $20,000 to a gamble with a 0.5 probability of $10,000 and a 0.5 probability of $30,000. Based on this information:

When facing a 50% chance of receiving $50 and a 50% chance of receiving $100, the individual pictured in Figure 5.2.2:

Bill's utility function takes the form U(I) = exp(I) where I is Bill's income. Based on this utility function, we can see that Bill is:

The weighted average of all possible outcomes of a project, with the probabilities of the outcomes used as weights, is known as the:

In Eugene, Oregon, next year there is a 2% chance of an earthquake severe enough to destroy all buildings and personal property. Quincy, who has $3,000,000 in buildings and personal property, has the opportunity to purchase complete earthquake insurance. Which is true?

The information in the table below describes choices for a new doctor. The outcomes represent different macroeconomic environments, which the individual cannot predict.Table 5.3 -In Table 5.3, the standard deviation is:

Irene's utility of income function is Irene is offered the following game of chance. The odds of winning are 1/100 and the payoff is 75 times the wager. If she loses, she loses her wager amount. Calculate Irene's expected utility of the game.

The standard deviation of a two-asset portfolio (with a risky and a non-risky asset) is equal to:

Consider the following information about job opportunities for new college graduates in Megalopolis:Table 5.1 -Refer to Table 5.1. A risk-neutral individual making a decision solely on the basis of the above information would choose to major in:

Scenario 5.7: As president and CEO of MegaWorld Industries, Natasha must decide on some very risky alternative investments. Consider the following: -Refer to Scenario 5.7. As a risk-neutral executive, Natasha:

Individuals who fully insure their house and belongings against fire:

Any risk-averse individual would always:

To optimally deter crime, law enforcement authorities should:

Preliminaries

The Basics of Supply and Demand

Consumer Behavior

Individual and Market Demand

Production

The Cost of Production

Profit Maximization and Competitive Supply

The Analysis of Competitive Markets

Market Power: Monopoly and Monopsony

Pricing With Market Power

Monopolistic Competition and Oligopoly

Game Theory and Competitive Strategy

Markets for Factor Inputs

Investment, Time, and Capital Markets

General Equilibrium and Economic Efficiency

Markets With Asymmetric Information

Externalities and Public Goods

Behavioral Economics

Filters

Irene's utility of income function is Irene is offered the following game of chance. The odds of winning are ¹/₁₀₀ and the payoff is 75 times the wager. If she loses, she loses her wager amount. Calculate Irene's expected utility of the game.